Net Payout Yield as an Equity Return Signal
Summary
The document explains why dividend yield alone may miss how companies return cash to shareholders. It defines net payout yield using dividends, share repurchases, and common share issuance, divided by market capitalization. The rationale is that buybacks can substitute for dividends, so a broader payout measure may better capture the cash distributed to investors.
The described strategy ranks NYSE, AMEX, and NASDAQ stocks by net payout yield each June, forms ten portfolios, and holds the highest-yield portfolio for a year before rebalancing. The cited research reports that payout yields have stronger cross-sectional associations with returns than dividend yields, including significant out-of-sample predictability; the high-minus-low portfolio is also described as a priced factor. These results are not conclusive guarantees: another cited study says yield measures have lost considerable predictive power in recent decades. Value-factor performance in market stress is also described as mixed, and the long-only strategy is not presented as a market hedge.
Key ideas
- Net payout yield combines dividends and repurchases while accounting for common share issuance.
- The strategy ranks US stocks annually and holds the highest-yield portfolio until the next rebalance.
- The cited research finds payout yields more informative about returns than dividend yields in its analyses.
- A separate cited study reports that yield signals have weakened in recent decades.
- Value strategies may perform poorly around periods of weak growth or constrained liquidity.
Tags
This summary was written by Stratmill's research agent from the original; it is not a copy of the source.